This

**preview**has**blurred**sections. Sign up to view the full version! View Full DocumentFIN 534 Test 3
•
Question 1
Which of the
following statements
is
CORRECT?
Answer
Correct
Answer:
If a loan has a nominal annual rate of 8%, then the effective rate will never be le
than 8%.
•
Question 2
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
Time lines can be constructed to deal with situations where some of the cash flows
occur annually but others occur quarterly.
•
Question 3
You are considering
two equally risky
annuities, each of
which pays $5,000
per year for 10 years.
Investment ORD is
an ordinary (or
deferred) annuity,
while Investment
DUE is an annuity
due. Which of the
following statements
is CORRECT?

Answer
Correct
Answer:
A rational investor would be willing to pay more for DUE than for ORD, so their
market prices should differ.
•
Question 4
You plan to analyze
the value of a
potential investment
by calculating the
sum of the present
values of its expected
cash flows. Which of
the following would
increase
the
calculated value of
the investment?
Answer
Correct Answer:
The discount rate
•
Question 5
Your bank account
pays a 6% nominal
rate of interest. The
interest is
compounded
quarterly. Which of
the following
statements is
CORRECT?
Answer
Correct
Answer:
The periodic rate of interest is 1.5% and the effective rate of interest is greater t
6%.
•
Question 6

Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
Time lines can be constructed where some of the payments constitute an annuity bu
others are unequal and thus are not part of the annuity.
•
Question 7
You plan to analyze
the value of a
potential investment
by calculating the
sum of the present
values of its expected
cash flows. Which of
the following would
lower
the calculated
value of the
investment?
Answer

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